Market Update — July 1, 2013
Good morning. Here are some of the numbers that I found most interesting from a few articles that I read this week.
Markets and Economy
Strong first half of the year. The Dow Jones Industrial Average ended the first six months of the year up 14%. The Dow was up over 15% through May and dropped 1.4% in June.
Higher yields. The ten-year UST yield rose to 2.485% (from 1.63% in early May). The last time that yields rose so much (as they did in the second quarter) was 2010 Q4.
Higher mortgage rates. Rates on fixed mortgages surged this week to their highest levels since July 2011. The rate jumped from 3.93% to 4.46% — the most since April 1987. The rate on the 15-year mortgage increased from 3.04% to 3.50%.
Moving out of munis. Investors took almost $10 billion out of municipal bond funds in the past month.
Low inflation. Overall inflation was 1% in May from a year earlier. Core inflation rose 1.1% from a year earlier. That matched the previous month’s reading and equaled the smallest rise in underlying prices on record.
Underemployed young people. In 2001 the underemployment rate (for 22 – 27 year olds) fell to as low at 35%, but last year it rose to 44%.
Banking
More IPOs. Global equity issuance is up 36% (vs. the same period last year) to $381bn.
Fewer deals. The value of deals announced globally fell 9.7% in the first half, to $870bn.
Thank goodness the bankers will be able to eat. Investment banking fees have risen 9% to $36bn this year from the same period in 2012. Of the global fee pool, 59% was generated in the Americas.
Oil
The oil is flowing. The U.S. pumped 6.5 million barrels a day of oil last year, according to the Energy Information Administration, the most since the mid-1990s. In April, we pumped 7.4 million barrels per day. This was the best month in more than two decades.
But gas prices didn’t drop. The price of a gallon of regular gasoline averaged $3.62 in 2012, the highest on record.
Fracking! The fracking boom has boosted U.S. production by roughly 2 million barrels per day over the past five years. While this is a large increase for the U.S., it represents just over 2% of worldwide oil consumption.
Gold
Gold hit three-years lows. It has dropped 13% since the start of June and is down approximately 30% since the start of the year. The 23% drop in Q2 was the largest quarterly decline since the start of modern gold trading.
Most commodities are down. The Dow Jones Commodity index is down 9.9% this year. But, lean-hog prices are up 19%.
I wish I hadn’t taken on that debt! In the past 10 years, the 55 gold and silver companies analyzed by BMO Capital Markets have increased their net debt from less than $2 billion to a record of $21 billion. In other words, firms have increased leverage and now prices have dropped.
Cost of mining an ounce of gold. The cost of mining an ounce of gold rose to $775 in 2012 from $280 in 2005 (according to BMO).
Education
More degrees, but falling in the rankings. From 2000 to 2011, the percentage of Americans (age 25 – 34) holding a degree (from either a community college or four-year institution) increased from 38% to 43%. But, we fell from 4th place to 11th place (when ranked against other countries).
We need a one-semester degree. More than 70 percent of Americans enter a four-year college (ranking us 7th). But, less than two-thirds (of those that enter) end up graduating. If you include community colleges, the graduation rate drops to 53 percent. Of the 23 OECD countries being studied, only Hungary does worse.
Is it worth it? According to the O.E.C.D., a college degree is worth $365,000 for the average American man after subtracting all its direct and indirect costs over a lifetime. For women, it’s worth $185,000. (I haven’t read this report. One thing I always wonder about is whether these studies compare jobs that require degrees with jobs that don’t. If so, the numbers are misleading because many people with degrees end up working in jobs that don’t require degrees.)
The real salary jump comes from four-year degrees. According to the O.E.C.D., a typical graduate from a four-year college earns 84 percent more than a high school graduate. A graduate from a community college makes 16 percent more.
Wealth gap in education. The college graduation rate of high-income Americans born in the 1980s was 20 percentage points higher than in the 1960s. Among low-income Americans, it advanced only 4 percent.
On average, we’re average. (Maybe we’re not ready for college?) In 2009, American 15-year-olds ranked 17th in reading tests — among 65 nations. They ranked 27th in math and 23rd in science.
Higher cost of education (us teachers have to keep up with the bankers). The tuition for 2011-12 at four-year public colleges rose an average of 15.6%, while the increase at four-year private nonprofit colleges was 10.2 percent.
Who charges the most? Columbia University had the highest tuition among all private nonprofit colleges in 2011-12—just over $45,000—followed by Sarah Lawrence College, Vassar College, George Washington University, Trinity College, and Carnegie Mellon University, where tuition and fees all exceeded $44,000.
Tuition charges are somewhat misleading. Net-price increases (increase in tuition less the increase in scholarship and grants) were 5.1 percent at public colleges and 8.5 percent at private nonprofit institutions.
CEO Compensation
CEO compensation. The top 200 chief executives at public companies with at least $1 billion in revenue received a median 2012 pay package of $15.1 million. This was a 16% increase from 2011.
Compensation is mostly stocks and options. Median cash compensation was $5.3 million last year, while stock and option grants came in at $9 million.
CEOs own a lot of stock! The median value of stock holdings of these C.E.O.’s was $51 million.
Golden parachutes. More than 60% of Fortune 500 companies had golden parachutes in place by 1990. Today, about 82% of the CEOs of Standard & Poor’s 500 companies are entitled to some type of cash payment if they are replaced upon a change in control.
Have a great week.
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Sandy Leeds, CFA is a Distinguished Senior Lecturer at the McCombs School of Business at The University of Texas at Austin. He teaches graduate level classes in the MBA program and also serves as President of The MBA Investment Fund, L.L.C. Prior to teaching, he had careers as a lawyer and a money manager. He did his undergraduate work at The University of Alabama and also has a law degree from The University of Virginia and an MBA from the University of Texas. At UT, he has received many teaching awards, including Outstanding Professor in the MBA Program. He is married and has three children.
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